Many investors have embraced the exchange-traded product structure as the preferred vehicle for accessing broad based commodity exposure. Investors have a whole host of options available to them, with some funds focusing in on specific commodity families, while other offerings employ unique methodologies to help fight the impacts of contango. One of the oldest ETPs offering broad exposure to the commodity market is the iShares GSCI Commodity-Indexed Trust Fund (GSG), which has amassed close to $1.5 billion in assets under management since its launch in the latter half of 2006 [also see Three Legendary Commodity Investors].
GSG is similar to other broad commodity ETPs in many ways, however, its product structure results in a unique risk/return profile that may attract some investors while potentially turning away other.
Here’s a quick overview of the basics of GSG:
- Issuer: iShares
- Index: S&P GSCI Total Return Index
- Number of Commodities: 24
- Largest Allocation: Crude Oil (32.7%)
- Inception Date: July 10, 2006
- Expense Ratio: 0.75%
- Assets: $1.3 billion (as of 11/9/2011)
- Structure: Commodity Pool / Partnership
Under The Hood
GSG seeks to replicate the S&P GSCI Total Return Index, a benchmark that consists of 24 different commodity futures contracts. The index breakdown by commodity family is presented in the following table (as of 10/31/2011) :
GSG includes positions in all of the major segments of the commodity market, including exposure to energy, precious metals, agriculture, industrial metals, and livestock. But these weightings are far from equal; GSG’s underlying portfolio is heavily tilted towards energy commodities, which account for over two thirds of total assets.
Besides the hefty allocations to energy commodities, there are a few other aspects of GSG that are noteworthy. The structure of this product should be considered; this ETP is structured as a commodity pool, which in turn makes shareholders limited partners in the investment trust. That structure can have some unique tax ramifications; GSG will incur a liability annually, regardless of whether a position is liquidated. During periods of strong gains, GSG may present investors with a significant tax liability, making it less than optimal for many long-term, buy-and-hold portfolios [see also Thee Things Wall Street Journal Didn't Tell You About Commodities].
Investors should also keep in mind that because GSG is a futures-based product, it is susceptible to tracking error, which could potentially have a significant impact on bottom-line returns over the long haul. It’s also worth noting that shareholder of GSG must fill out a K-1 tax form at the end of every year, which may increase the administrative burden associated with this product.
It should be noted that iPath offers an ETN linked to the same index that is the basis for GSG; for those looking to avoid the potential tracking error and tax consequences, GSP might be a more interesting product.
How To Use
GSG features a host of drawbacks and nuances that make it less than ideal for those looking to add well-rounded commodity exposure to their portfolios. Given the fund’s tilt towards the energy sector, GSG may have appeal as a tactical tool for investors who have a bullish outlook for energy prices but don’t necessarily want to go “all in” so to speak; in which case the minimal exposure to agricultural and industrial metals can serve as a nice cushion to smooth out the inherent volatility prominent across the energy commodities [see Crude Oil Guide: Brent Vs. WTI, What's The Difference?].
Disclosure: No positions at time of writing.